Northern Rock's mortgage book was not sufficiently attractive for Royal Bank of Scotland, Deutsche Bank and Citigroup, so it's ended up in state hands.

Ultimately, how much of its £25bn loan the taxpayer will recover depends on how well the crippled bank's former chief executive Adam Applegarth wrote new business. It's hardly reassuring.

Alistair Darling and the Financial Services Authority have been adamant that Northern Rock's mortgage book is "good quality". Addressing the House of Commons yesterday, the Chancellor once again stressed that the collateral against which the taxpayer is now secured is "high quality mortgages". It's a line the Government has stuck to firmly since the crisis struck on September 14. Then it said: "The FSA judges that Northern Rock is solvent … and has a good quality loan book."

But it's a line that's looking increasingly shaky. For the first time yesterday, the Treasury acknowledged that the taxpayer may lose out. Outlining its proposed rescue package, it said: "Any losses would first be borne by Northern Rock, protecting the taxpayer in the case of underperformance of the assets." In other words, once Northern Rock can't bear the losses, the taxpayer steps in.

So what exactly does the taxpayer now own for its £25bn loan and £30bn guarantee? And just how "high quality" is it? Compared with peers, not awfully appears to be the answer. A key measure of mortgage quality is the loan-to-value (LTV) ratio, which measures how much of the property's value the bank lent to the buyer. As the table shows, Northern Rock's LTV is the worst among its peers. Strip out the behaviour of the first six months of last year and the picture is starker.

Northern Rock lent an average 78pc of the value of a home in the six months to June, just as the market peaked. The next closest lender was Alliance & Leicester, with 67pc. Break the numbers down further and it emerges that £3.3bn worth of mortgages were sold in the first half of 2007 with an LTV of more than 90pc, and another £1.46bn of riskier buy-to-let deals were signed. If Credit Suisse is correct in forecasting a 10pc house price collapse this year, Northern Rock will almost certainly have to crystallise a loss on these assets.

In total, Northern Rock has lent almost £21bn through its controversial "Together" product, which offers loans of 125pc on a property's value, and £6.2bn of buy-to-let. Both products are considered higher risk, yet make up a third of the £85.2bn residential mortgage book. In all, some £26bn of its mortgages have an LTV of 80pc or more. On top of that sit a further £7.8bn of unsecured loans.

"Undoubtedly, Northern Rock has the riskiest mortgage book of its peers," one analyst, who declined to be named, said. "Northern Rock was pushing the envelope. Any decline in the housing market will affect it more as its takes a higher LTV and has been lending most aggressively most recently."

The bank insists its mortgage book is better than average. But the measure it uses is arrears levels, where it is ahead of the industry. One analyst said: "When a bank grows aggressively, the arrears levels seem proportionately low because the bank is putting on so many new mortgages - and mortgages don't tend to go bad in the first year." In other words, Applegarth's ambitions were masking problems.

And those ambitions were certainly grand. As recently as February, he declared he wanted the bank to become the nation's third largest lender - leapfrogging Lloyds TSB and Abbey. Pursuing the goal, Northern Rock wrote almost a fifth of all new UK mortgages in the first half of 2007 against its 7.6pc market share. At the same time, checks and balances that would have reined back Applegarth seemed to evaporate.

Insiders say a sensitivity check for buy-to-let borrowers to establish whether they would be able to meet their repayments in a rising interest rate environment were quietly dropped. Simultaneously, the treasury department, which was responsible for ensuring the bank had sufficient funding, was ordered to switch its reporting line from the finance director to Applegarth, who has no accounting or banking qualifications.

Other examples of a more cavalier approach to management also began to emerge. In March last year, he and other executives decided to book an extra £39m profit by selling an "insurance policy" - known technically as an interest rate swap - which was meant to protect the bank against rising interest rates and which could have lessened the effects of the worldwide credit crunch. In June, the bank set up a subsidiary called Kielder Property Management to buy its customers' repossessed homes, potentially profiting from their woes. Others in the industry shied away from such practices.

Applegarth originally made waves by being the first to move his mortgage qualification process to an "affordability" model, which assessed customers on their ability to meet monthly payments. It was the start of the roller coaster in income multiples across the industry that saw them peak with offers of up to six times salary.

Such aggressive tactics now risk costing the taxpayer. Analysts say provisions on Northern Rock's mortgage book are woefully low. "Either they believe they have the best mortgages in the market or they simply have not been provisioning enough," one said.

The fear is that a fall in house prices will expose the mortgage book as poor quality, a far cry from the FSA's reassurances.

One senior source said: "In housing recessions, 80pc of losses are from 20pc of mortgages. With all the 90pc LTV Northern Rock has - that is the stuff which will go bad first."

Whatever is in that bottom 20pc of the bank's mortgage book appears to have scared off the lending banks and prompted the Treasury to demand from any bidder "a significant buffer to protect taxpayers' interests".

Last June, Northern Rock had a total "buffer" of £4.43bn - £1.75bn of retained earnings and £2.68bn of preference equity and tier one and tier two capital. But there is unlikely to be much of retained earnings left after paying running costs, staff retention bonuses and loan interest. Hence the Treasury's insistence that any bidder inject up to £1.4bn in equity.

In other words, Northern Rock is likely to be able to absorb only a 4pc deterioration in the value of its £113bn of assets before the taxpayer takes a hit. Given the nature of the bank's mortgage book and the outlook for house prices, that's reason to be worried.